"It (the quarter) began with record sales in December. However, the Omicron variant significantly impacted guest demand, restaurant staffing and operating expenses in January."
- Darden Restaurants Chairman and CEO Gene Lee
On Thursday morning, Darden Restaurants (DRI) released the firm's fiscal third quarter financial results. For the three month period ending February 27th, the firm posted GAAP EPS of $1.93 on revenue of $2.449B. While the sales number was good enough for year over year growth of 41.6% (an acceleration over the prior quarter)... the fact is that last year makes for a poor comparison for restaurant businesses, and performance fell short of Wall Street's expectations at both the top and bottom lines.
Same restaurant sales increased 38.1%, while 33 new locations were added. Same restaurant sales grew 29.9% at Olive Garden, by 31.6% at LongHorn Steakhouse, by 85.8% for the Fine Dining segment, and by 55.2% for all other businesses in aggregate. At quarter's end, Darden was operating 881 Olive Gardens, 539 LongHorn Steakhouses, 173 Cheddar's Scratch Kitchens, 85 Yard Houses, 61 Capital Grilles, 44 Seasons 52's, and 72 other locations.
Some Nitty Gritty
Average weekly sales increased from $73,404 last year to $101,490. This beats the $100,195 weekly average from the year prior. Darden repurchased $382M worth of outstanding common stock over the three months. Though the year prior was certainly not the standard, the ball is moving (opinion) in the right direction. While sales were up 41.6% to $2.449B, operating costs and expenses increased 35.5% to $2.147.9B, leading to operating income of $301M (+103.3%), and ultimately net income of $247M (+91.9%).
Net cash provided by operations increased 22.8% to $916.5M. The firm did burn some cash keeping the doors open and confronting staffing issues during the height of the Omicron surge. Readers will see this impact illustrated in the balance sheet.
Darden ended the reporting period with a net cash position of $555.3M, down from $1.214.7B nine months earlier and from $746.3M the previous quarter. This drops current assets to $1.280.1B, a third consecutive month of declines for that entry. Current liabilities hit the tape at $1.815.9B, up a rough $100M mostly due to an increase in net unearned revenues. That leaves the firm's current ratio at an ugly 0.7, down from 0.85 three months ago.
The implication would be that at some point in the near to medium term, Darden could have a difficult time meeting the firm's obligations. Total assets amount to $10.205.4B, which still easily outweighs liabilities less equity of $7.919.6B.
I've got to tell you that I was really starting to like this name until I got to the balance sheet. This balance sheet does not pass my test and that will impact my decision.
For fiscal 2022, Darden sees total revenue of $9.55B to $9.62B producing EPS of $7.30 to $7.45. Wall Street was looking for something like $9.6B, so that's sort of cool, but also for EPS of $7.50 or slightly higher. That's a problem. The firm expects same restaurant growth of 29% to 30%, a slight downward modification from prior guidance of 29% to 31%.
Readers will see that DRI has been in a downward sloping trend since peaking last September. This morning's opening forces the last sale back toward the central trend line of our "still in force" Pitchfork model as the stock has met 21 day EMA resistance last week into this week and failed. The daily MACD is rather weak, as is Relative Strength. The Full Stochastics Oscillator had started to look strong, but the early Thursday action will take a bite out of that.
Can I say anything nice about Darden Restaurants? Sure. I think management did do a nice job getting through a difficult quarter to manage across several fronts. I like the fact that the stock is nowhere near over-valued at 17 times forward looking earnings, and I like the fact that DRI pays an annual $4.40 a year dividend (yielding 3.36%) just to hang around. That said, should a firm with a balance sheet suffering a period of quality erosion really be repurchasing common equity and paying out a handsome dividend? Maybe. Maybe not.
I almost want to like this name. I really do. I am going to give Darden another quarter. I'll see how it develops and if the balance sheet shows some improvement. That said, should the shares pressure the lower bound of that Pitchfork model, sub-$116ish, I will likely be tempted.
That said, if I can get paid $5 or more to get short July $115 puts or $3 or more to take on $110 equity risk also expiring in July... I would have to seriously consider that.